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The S&P 500 was up 1% on Monday with volume barely below Friday’s volume and also just below the 30-day moving average volume. If the S&P 500 closes down on Tuesday by about 58 points (4.7%) our automated forecast would likely flip to uncertain based on the stop-loss safety trigger.

Subjective Comment:

The S&P 500 was up as much as 1.8% on Monday. The intraday index shot up quickly at the open following the European markets up. US markets then traded in a relatively narrow range until 1:40 in the afternoon (Eastern time), after which the markets fell and closed up 1% on the day. The reason for the drop was Standard & Poor’s announcement their AAA credit ratings for 15 Eurozone nations could be downgraded. If you had a buy order placed prior to the market opening, you might have a small gain for the day. If you bought after the market opened, you probably saw your investment value decline when the market closed lower but still up compared to Friday’s close.

As we discussed Thursday and Friday last week, the market drama this week will center around the European summit coming this weekend with possible announcements as early as this Friday, December 9th. The S&P announcement regarding possible downgrades of 15 European countries clearly is connected to the debt crisis. The fact the announcement caused US markets to lose almost half of Monday’s gains shows market participants are carefully watching Europe. We think next week US markets will move up or down based on what the European Central Bank (ECB) does next regarding Eurozone monetary policy. Please see our posts from late last week for additional details.

As for today’s market data, the upward motion in the index was on volume just below average, and the average market volume has been declining for quite a while. The absence of strong volume to go with the upward motion in the markets is cause for concern and pause. Most market participants have figured out the obvious impact the Eurozone crisis is having on US markets. The below-average volume indicates most of the money invested today is uncertain if the ECB will begin massive money printing in the near future or not. If the market were certain, volume would be much higher. While uncertainty remains, expect US markets to either bounce up and down this week, or grow on weak volume. If down-days are on higher volume and up-days on lighter volume, this would be a pattern predictive of weakness. An up-day on light volume like Monday is not part of a weak pattern, but neither is it part of a strong pattern.

Tuesday next week the Federal Reserve’s Open Market Committee (FOMC) meets. There has been speculation the Fed might announce QE3 to buy another half-trillion dollars of Mortgage Backed Securities in an effort to further stimulate the US economy. Next week’s FOMC is the last meeting with this year’s voting membership. On January 24-25 the FOMC meets again with its new voting members, followed by the next FOMC meeting on March 13. Current voting members of the Fed who have been more vocal opponents of further stimulus will rotate out of their voting positions at the end of the year. For this reason, we are guessing the Fed will not announce QE3 next week. If economic conditions do not further improve the Fed could launch QE3 in January or March. Of course, if the ECB fails to print enough Euros fast enough in the near future, the Fed may step in to halt the consequences of a debt crisis contagion that spreads from Europe to the US. As the FOMC meeting next week approaches, expect more news to pop up regarding what the Fed might do.

Our subjective comments focus on the money supply and how fast central banks will grow the money supplies because this is the major cause of booms and crashes in economies and stock markets. The money supply is affected by the decision to print new currency (physically or digitally) by central banks, and then the decisions by private banks to engage in fractional-reserve lending. This manipulates interest rates to be lower than would occur otherwise, which in turn artificially encourages investments in longer-cycle projects and business ventures. This mal-investment causes an up-tick in economic activity, followed by price inflation and eventually a crash when the growth rate of the money supply slows. This is why the US economy has experienced a mini-boom in response to the burst of lending this past summer. Since August the M2 money supply growth rate has resumed the same slow up-trend that existed before June. The mini-boom in the US will be short if M2 growth does not speed-up again. In Europe the Euro growth peaked at 11.7% in October 2007, followed by 2 years of continued growth at slower and slower rates until it was below 2% in November 2009. Since then the Euro M2 growth rate has been held between 1.3% to 2.6%. After accelerating growth from July 2004 to the peak in October 2007, the slowing and low Euro M2 growth is why Eurozone economies are crashing. With all the debt that has piled up across Europe, only massive Euro printing can delay defaults and bankruptcies. Printing will not prevent it, only delay it.

If you have not yet invested in US markets, consider waiting until early next week while the drama in Europe plays out this week. News will cause the market to jump about, but the real story lies in the market index motion combined with daily volume. Continued weak volume means market participants are not sure what will happen. When volume gets stronger we will know that certainty has developed and we will have a better handle on the direction the market will go. If you decided to speculate that massive money printing is about to happen, then hold on to your current investments.

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